To enjoy the perks and luxuries of life, it has become a necessity to maintain a good credit score. It plays a leading role in your life and makes everything more affordable. But if you have a poor credit score, it can turn out to be a significant hindrance when you plan to make changes in your life and need to buy a new house or a new car.
Building a credit score that is acceptable and attractive to lenders takes a considerable amount of time. Therefore, it is always recommended to start building one even when you don’t need it at the current moment. It will not only help you to get a loan with terms that are in your favor but will also help you save money on utilities.
A credit score is calculated by analyzing your payment history, your current amount of credit, and your credit history. Many people don’t realize the importance of keeping up with this data. The recovery of a credit score, as mentioned earlier, takes time and is more like a marathon than a sprint.
In this blog, we have highlighted a few ways that can help enhance your poor credit score and bring it back on track.
1. Pay bills on time
One of the biggest factors that cause the credit score to drop down is late payments. Lenders always check your payment history — that is the basis of the formation of a credit score. If you pay your bill 30 days late, your score will be dragged down significantly.
There might be times when you are bound to make late payments because of tight financial conditions. But when your situation has returned to normal, it is time that you spend less and start a track record that shows you pay your bills on time.
2. Manage and pay off the debt
Credit is available to us for our ease and convenience. Therefore, it is beneficial for us if we manage it properly. Always aim to keep your credit utilization, also called your debt utilization, as low as possible.
What many experts suggest is to utilize no more than 30% of your credit limit, meaning your balance is never above this number. This is because once the statement is generated, it shows up on your credit report, possibly reducing your score. To manage this, decrease your utilization before the statement is generated. So, when a credit agency or any other lending institution runs a check on you, they don’t see any outstanding balance.
If you are carrying a balance on your credit card, then consider making a plan that requires you to make several payments throughout the month or in one go. Pay them off as early as possible and before the next statement closes.
3. Increase your limit on the available line of credit
If you have one or two credit cards, then they are more than enough to cover your needs and to build up a high credit card score. Many people fail to understand this concept and opt to go to another credit card facility. This new line of credit might look tempting as it lowers your credit utilization ratio, but it triggers a new credit inquiry and lowers the average age of your accounts.
If you want to increase the credit limit available to you, you should ask your current credit card issuers to increase your available limit on the same card. This increase in the total available credit lowers your credit utilization ratio and gives you a cushion in times when you don’t have enough cash to pay off your debt.
4. Never close your old cards
There is a general perception that if a negative payment history has been built on a card and it has become almost impossible to cover it up, the solution is to close that old credit card which will erase its bad information. This is not true at all. Old credit cards are a great source of boosting your credit score as the length of credit history makes up almost 15% of your score. So closing them down is not a good move. Credit mix even makes up 10% of the credit score, so it is better to keep all your old cards open.
5. Know your credit risks
It is possible for you to pay to view your credit scores once a year. By purchasing this, you are not only able to view your credit score but are also provided with a list of risk factors that you are currently facing and need to work on to improve your score. These risk factors are as many as 300 in numbers and give you a good starting point regarding the areas you need to improve on.
Many credit card companies even include your score on their statements which means you have an access to them for free. While this number is not exactly the same one that lenders see, it gives you a fair enough idea of where you stand and what you need to work on for a better future score.